EUR/USD weakens as French political turmoil and and mild US-China de-escalation drive sentiment

• The Euro trades on the defensive as France's political uncertainty weighs on sentiment.
• French President Emmanuel Macron's decision to reappoint Sébastien Lecornu as Prime Minister fails to reassure investors amid fiscal concerns.
• The US Dollar strengthens after Washington and Beijing signal de-escalation in trade tensions.

The Euro (EUR) trades on the back foot against the US Dollar (USD) on Monday as renewed political uncertainty in France weighs on sentiment, while the Greenback regains ground after a brief de-escalation in US-China trade tensions calmed market nerves.

At the time of writing, EUR/USD is hovering near a more than two-month low around 1.1576, erasing all of Friday's modest gains and down nearly 0.35% on the day.

Investors remain cautious after French President Emmanuel Macron reappointed Sébastien Lecornu as Prime Minister and unveiled a new cabinet over the weekend, a move aimed at restoring stability following weeks of political turmoil. However, the conservative Les Républicains party expelled six lawmakers who accepted ministerial positions, signaling deep fractures within the French political landscape and raising doubts over the government's ability to pass its 2026 budget.

Meanwhile, the US Dollar drew mild support as traders scaled back extreme risk-off bets after Washington and Beijing signaled readiness for dialogue. The US Dollar Index (DXY), which measures the Greenback's value against a basket of six major peers, climbs back above 99.00, recovering ground lost on Friday after President Donald Trump softened his stance on tariffs against China. Trump said the United States "wants to help China, not hurt it," a notable shift in tone following last week's announcement of 100% tariffs on Chinese imports starting November 1.

In the United States (US), the partial government shutdown stretched into its 13th day on Monday, with lawmakers still deadlocked over a temporary funding measure to reopen federal agencies. The Office of Management and Budget (OMB) said on Friday that staff furloughs had already begun, as most government departments remain closed. With Congress out for the Columbus Day holiday, no votes or negotiations are expected until lawmakers return on Tuesday.

At the same time, prospects of two more interest rate cuts by the Federal Reserve (Fed) this year could limit the Dollar's upside, as traders anticipate further policy easing despite inflation remaining above the 2% target. Market participants increasingly believe the Fed will place greater emphasis on addressing signs of labor market weakness, reinforcing expectations for rate cuts later this month and again in December.